Looming crisis just around the corner…

Looks like things in the high-rise industry are tougher than we thought.

One of the odd things in economics and finance, is how long a market can be glaringly out of whack before the general public cottons on.

I’m thinking now about the emerging glut in high-rise apartment towers, and their dependence on foreign buyers.

I’ve been warning my readers about this market segment for almost two years now. Finally, it’s becoming common knowledge. Every week, we hear another warning about the coming shake-out. First it was in the financial papers. In recent weeks it’s gone main-stream.

It seemed that I was one of the first to pick up on it, but I didn’t have any special insider access or anything. I just had a curiosity, some publicly available data and a street-gambler’s instincts for a bad deal.

What’s surprising then is that while this unshaven high-school drop out picked up on it, no one in the industry seemed to, and rather than the collective wisdom of the market spontaneously changing course and rectifying the imbalances, things actually got worse.

We actually saw more and more approvals enter the pipeline, and a greater dependence on Chinese and foreign buyers.

And this is how crises happen.

And if you want to get a sense this week of how bad things are getting, take a look at the panic taking hold of the big developers.

The AFR is reporting that last Thursday, about 60 of the city's most powerful residential developers gathered together in the swanky Westin Hotel on Collins Street in the Melbourne CBD

“Those who attended the meeting covered every sector and segment of the development community from big listed players like Lendlease and Mirvac to the major private developers including Central Equity, ISPT, Metro Property Development, Gurner, BPM, Salta, Salvo and Little Projects.

A big block of attendees were Asian developers led by Malaysian giants SP Setia (which recently paid a record $101 million for the Telstra development site in the CBD) and UEM Sunrise, state-owned Chinese developer Poly Real Estate and CEL Australia, the local arm of Singapore-listed Chip Eng Seng.

The main items on the agenda: The sudden pullback by the major banks from lending to foreign buyers and new taxes imposed on foreign buyers in Victoria from July 1, including a 7 per cent stamp duty surcharge.

Developers fear this could lead to a surge in settlement defaults and send apartment values plummeting.

Danni Addison, CEO of the Urban Development Institute of Australia, told the Australian Financial Review there was great concern about the impact of numerous policy decisions on the property development industry and the economy.

“The industry has come together as one voice to tell the government about the real economic impact their decisions are having on the ground,” Ms Addison said. She said the UDIA and the Property Council will seek meeting with the state government to voice these concerns.”

Australia has a proud tradition of shameless rent-seeking, and it’s heartening to hear our big developers are giving our Asian friends a lesson in Aussie values.

But it’s hard to feel sorry for a mob wrestling with a demon that they themselves created.

And it’s a simple story of over-supply.

Next year alone, 20,000 apartments will be completed across Melbourne. In 2004, when everyone was freaking out about the glut in Docklands, Melbourne added just 6,000.

So it’s this glut that’s hammering prices. It’s hard to know exactly, but there’s reports that resale prices have already fallen 25% – though developers are working hard to keep this fact covered up.

And that’s the rub of the problem. It’s not the fact that banks are blacklisting China, or the government has added an extra 7% to foreign buyer stamp duty.

It wouldn’t matter if the Chinese buy was drying up IF these developers had produced a reasonable amount of stock that was attractive to all buyer segments.

But this is exactly what they didn’t do.

They put all their eggs in one basket. They focused on the Chinese market – with all these one-bedroom dog boxes, and were banking on Chinese investors soaking up the glut.

Charter Keck Cramer’s director of researchers, Robert Papaleo, has claimed that nearly half of Melbourne’s off-the-plan apartments are being purchased by foreign investors.

Half!

But now the Chinese flows are being crimped (mainly by tighter capital controls in China), they need help to move an excess bunch of stock that no one in Australia wants.

And with each foreign buyer that fails or refuses to settle, the developer looks to lose about $100,000 (according to estimates by buyers agent, Paul Osborne) – even after they’ve kept the initial deposit.
En masse, that creates a systemic problem. The industry is in trouble. No wonder the banks have thrown the gears into reverse and are trying to cover their arses as quick as they can.

And no wonder the industry has started counting seats on the life-boats.

But it’s hard for me to feel sorry for them.

And it’s harder still for me to be convinced that I, or any Australian tax payer, should have to front the cash to bail them out of their hole.

But here’s another prediction for you. As this ship goes down in flames, they’ll have their hands out right to the very end.

Comments

oh dear! the poor greedy darlings are gonna hurt. these ;pompous greedy lemmings are going to hit a brick wall. i was told many years ago that if you have a problem get outside and look back in…don’t look from the inside! it hasn’t happened…to quote a famous saying..’they were blinded by the radiance of their own brilliance’…big dummies,.as you say jonno they will come cap in hand to the public to bail them out like the banks did in 2008. aussie ones too. : nab, westpac and cba..three crooked outfits if ever there was. oh well rock on low interest rates and stuff the savers. if ever there is a recipe for empirical implosion the whole western world is headed there. up the lemmings.! cheers ron
obtw. prince andrew and bill clinton have something in common..guess? see jeoffrey epstein for further edification. lol lets become a republic real soon guys.

Very informative as always! Thank you. I do have a request though. On 14 August 2014 you shared a wonderful analytical piece using the economist housing index took. Would love to see what that looks like now. Thx again

Small investors go bust if they make mistakes, but the big end of town always appeal,that they too important to be liquidated.
Small builder, grocer or airline goes bust, nobody cares, they were just inept traders.
Big business, Ansett, Motor manufacturers, steel makers, etc go under and it’s a tax payers problem.
Nice to have a multi million dollar income and be assured of government assistance when it goes belly up.

Cashed up foreign buyers wouldn’t need any help from our banks. However, the developers who’ve had to borrow to build those concrete dominoes are as greedy as the local governments who approved the developments. How many economists and bankers are also councillors? Or are they employed by the Valuer General who sets land prices. Local governments keep increasing rates levied on residential housing and businesses. In these deflationary times it is imperative that rates get reassessed downwards. We can trust the Federal Government to occasionally cut taxes but when are we going to see councils lower the annual rates they extort from us? Maybe it’s time to privatise garbage and recyclable collection services and merge all councils until they’re sized up to Federal electorate boundaries.

what is happening with all these off the plan things should never had happened in the first place, if it wasn’t because of the greedy banks. When I discovered couple years ago that, a foreign national, not an Oz citizen, not PR, not student, but just someone from “u know where” with a plane ticket, can come here to buy off the plan and get 70% loan from local banks to settle !! That was a shock to me. Obviously they passed their income test with their “overseas income” credentials. But we know (and the banks surely know) how much it costs to get a million dollars annual income credentials from “u know where” ? 1-2 thousand A$, with certified public notary stamped certifications !!! Try to prove you have $100K annual income here and see how much tax you will have to pay ? And try to get a loan in US with your Australian passport to buy a property ? Banks are greedy and reckless but they are certainly no idiots, they are happy to play along as long as they have music still playing to their ears, but will be the first to exit once they smell the rats.

How would bailing them out/not bailing them out be detrimental to society? That is the real question to be answered and weighted, before we could come to such a decision.

Here is an idea. Price of apartments fall. First home buyers get their chance to buy in at a reasonable price… we no longer need to cut negative gearing… everyone is happy (except the poor people who bought that off the plan they got spruiked). (OK, so no-one wants to live in a dog box… but is that the only apartments we are talking about here?)

I don’t see the government bailing out people who bought in mining towns and are struggling in negative equity, or anyone else heading towards foreclosure. Why would the government bail out one person with problems but not the other? This is not a natural disaster. This is people who made a decision in which they accept risk in the hope they enjoy the gain. You can enjoy risk free gains – its called a job. Maybe a term deposit. Want more return than that? Accept the risk like the rest of us.

Would the government be bailing out the people who put deposits on these apartments or just the developers?

No, I don’t think we should, although would listen to arguments why we should based on detriment to society.

Problems with buying any apartment:
(1) High cost per sq.m and you don’t even own the land the block is on
(2) Services charges that can quickly go through the roof especially with poorly constructed buildings (hence some of the fire sales I’ve seen)
(3) Property management issues and having to deal with responsive or non-responsive body corps.
(4) Capital gains far less than with free standing houses and in this current market apartments are also going down
(5) A better buy mid to long-term is a townhouse in the inner east suburbs with a small garden for less than the price of scarce 3 bedroom apartment in the same suburb. I’ll wager the townhouse will be a better investment.

You’re right Jon, it’s hard to feel sorry for them. It was greed that got us in this mess in the first place.
Greed from developers who built too much of exactly the wrong kind of stock.
Greed from Councils who were only too happy to rake in development fees and set budgets based on the extra rates they might receive.
And greed from the state governments whose budgets, like Councils, are similarly relying on the stamp duty on each sale and who made sure that the planning acts they passed in the various parliaments were sympathetic to developers so that as many flats could be crammed into as small a space as possible without allowing for lifestyle, liveability and amenity with the result that there is grossly insufficient car parking, no green space, no parks and no schools to accommodate for all the potential residents, not to mention the massive increase in flood risks, as we are now seeing.
And to compound matters, there’s no money available to bail out even these corrupt and fraudulent banks, who are aiding and abetting all this over building, let alone any of the developers.
Let the market sort it all out. It won’t end well for some.

hi edd,
you must be on the ‘same page’ as me. i think it should go universal..let everybody see the real world as it is. royalty, baronetsy, aristochracy etc..all scumbags. up ‘the donald’; jonnos favourite man and mine. i see many replies about the whacker builders in melbourne. they have got to accept responsibility i guess for what has happened. graft and corruption so hidden in the ‘western world’..but quite open in asian countries. yet we criticise them. and councillors. its almost legendary the capers they get up to australia wide and have for many many years,,maybe 200 🙂 and we are the lucky country…pig’s arse..(thats john elliott’s favourite comment)

Whatever the end game is, those that have bought at $10,000sqm are going to do their dough. Interesting to see how much lower rise (< 4 levels = no CFMEU) product can get built/sold at $4,000sqm all the way along transport corridors.

If greed is a driving force of human activity, how can we blame the developers for responding to a hungry market? Or even those evil men who from behind the scenes pull the strings and create crises and wars?
Everything flows… in cycles.

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